An Equilibrium Model of Lumpy Housing Investment

Abstract

We formulate and solve a dynamic general equilibrium model with heterogeneous agents and lumpy housing adjustment at the household level. We use the model to ask a simple question: how does the microeconomic lumpiness of housing adjustment affect the equilibrium dynamic properties of aggregate consumption and investment? Our main conclusion is that lumpiness matters: in particular, lumpiness in housing adjustment (1) reduces the volatility of both housing and business investment; (2) increases the volatility of aggregate consumption; (3) increases the correlation of housing investment with business investment and with GDP. We also show that lumpiness of investment activity at the household level has small but significant aggregate implications, in contrast with the literature that shows that the aggregate effects of lumpy investment at the firm level are negligible.